Contractual Profit Rights Limit Section 850, but Deferred LLP Awards Can Be Taxed under Section 687
Introduction
In Commissioners for His Majesty's Revenue and Customs v HFFX LLP [2026] UKSC 17, the United Kingdom Supreme Court considered the tax treatment of deferred remuneration arrangements used by members of HFFX LLP, a successful foreign exchange trading limited liability partnership.
The arrangements involved allocating part of the LLP’s profits to a corporate member, which later reallocated amounts as “Special Capital” to individual members. The intended effect was to subject the initial allocation to corporation tax rather than higher-rate income tax, and to avoid further tax on later reallocations.
The case raised two central issues:
- whether the profits allocated to the corporate member were, for income tax purposes, really the individual members’ profit shares under section 850 of ITTOIA 2005; and
- whether the later Special Capital receipts were taxable as income not otherwise charged under section 687 of ITTOIA 2005.
Summary of the Judgment
Lord Sales, giving the unanimous judgment of the Supreme Court, dismissed both appeals.
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HMRC’s section 850 appeal failed. Section 850 applies by reference to the partners’ contractual rights to share in profits during the relevant accounting period. The individual members had no such contractual right to the profits allocated to the corporate member.
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The individual members’ section 687 appeal failed. The later Special Capital receipts were income from an identifiable source: the individual members’ rights under the LLP deed, combined with the exercise of discretion by the corporate member under a legal framework constrained by Braganza duties.
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The “sales of occupation income” provisions in Chapter 4 of Part 13 of ITA 2007 were not decided. Since section 687 applied, it was unnecessary and inappropriate to determine that alternative issue.
Analysis
1. Section 850 ITTOIA: Profit-sharing Depends on Contractual Rights
The Supreme Court held that section 850 requires a partner’s share of profits or losses to be determined by the firm’s profit-sharing arrangements during the relevant period. Those arrangements mean the partners’ legal rights to share in profits and liabilities to share in losses.
The key principle is that section 850 is not a broad “commercial reality” test. It requires an existing contractual right to share in the partnership’s profits for the relevant period. Here, the individual members had only a possibility of receiving later deferred amounts, subject to recommendations, conditions and discretion. That was not enough.
2. Limits of Purposive Tax Interpretation
HMRC argued that the court should look at the commercial reality: the deferred awards reflected the individual members’ work and were expected to be paid unless something intervened. The Supreme Court rejected that approach.
The court accepted that tax statutes must be interpreted purposively, but stressed that the purpose must be derived from the statutory language and context. A court cannot impose tax by appealing to a broad anti-avoidance purpose untethered from the words Parliament used.
3. Section 687 ITTOIA: Deferred Awards Had a Taxable Source
The individual members accepted that the Special Capital receipts were income. Their argument was that the income had no “source” for section 687 purposes. The Supreme Court disagreed.
The relevant source was not the LLP’s trading activity itself, but the combination of:
- the LLP deed and Capital Allocation Plan;
- the individual members’ rights to be considered under that legal framework; and
- the corporate member’s decision to reallocate Special Capital, subject to duties of rational and proper decision-making.
The court rejected the argument that a source must be something “possessed” by the taxpayer. For section 687, it is enough that there is an identifiable legal and practical source from which the income arises.
4. Section 575 ITTOIA Argument Rejected
The individual members introduced a new argument based on section 575, contending that if the income fell within trading income rules in Part 2 of ITTOIA, section 687 in Part 5 could not apply. The Supreme Court allowed the point to be raised but rejected it.
The deferred receipts were not the same as the LLP’s trading profits. The profits allocated to the corporate member and the later income received by the individual members came from distinct sources. There was therefore no priority problem under section 575.
Precedents Cited
This case established that contractual discretions may be subject to implied limits: they must be exercised rationally, in good faith and for proper purposes. The Supreme Court treated the corporate member’s discretion under the deferred award arrangements as constrained by these principles.
Cited alongside Braganza, this authority supported the proposition that discretionary powers conferred by contract are not necessarily unfettered.
Dodd v Revenue and Customs Comrs (Revenue and Customs Comrs v BlueCrest Capital Management LP) [2023] EWCA Civ 1481; [2024] STC 92
The Supreme Court approved the Court of Appeal’s approach in this closely analogous deferred remuneration case. It confirmed that section 850 does not apply where individual partners lack contractual rights to profits allocated to a corporate partner, but that section 687 may tax later deferred awards as income from a source.
Revenue and Customs Comrs v BlueCrest Capital Management LP (Dodd v Revenue and Customs Comrs) [2022] UKUT 200 (TCC); [2022] STC 1696
The Upper Tribunal’s reasoning in BlueCrest influenced the analysis of section 687 and the distinction between partnership trading profits and later discretionary awards.
Cunard's Trustees v Inland Revenue Comrs [1946] 1 All ER 159; (1945) 27 TC 122
This was central to the section 687 issue. It showed that payments made under a legal discretion can have a taxable source, even if the recipient had no absolute entitlement before the discretion was exercised.
Drummond v Collins (1915) 6 TC 525; [1915] AC 1011
The court used this authority to reinforce the distinction between purely voluntary payments and payments made under a legal framework. The latter can constitute taxable income from a source.
These cases were considered in relation to purposive interpretation and tax avoidance. The Supreme Court accepted the relevance of purposive interpretation but held that it could not override the specific statutory requirement in section 850 for contractual profit-sharing rights.
Other authorities
The judgment also considered authorities including Bucks v Bowers [1970] Ch 421, Reed v Young [1985] 1 WLR 649, Dinham v Bradford (1869) LR 5 Ch App 519, Spritebeam Ltd v Revenue and Customs Comrs [2015] UKUT 75 (TCC); [2015] STC 1222, Stedeford (Inspector of Taxes) v Beloe [1932] AC 388, Brocklesby v Merricks (Inspector of Taxes) (1934) 18 TC 576, Manduca v Revenue And Customs Comrs [2015] UKUT 262 (TCC); [2015] STC 2002, Scott v Ricketts [1967] 1 WLR 828, Cooper v Stubbs [1925] 2 KB 753, and Bray (Inspector of Taxes) v Best [1989] 1 WLR 167.
Complex Concepts Simplified
“Look-through” taxation of partnerships
Partnerships and LLPs are generally tax transparent. The tax system looks through the entity and taxes partners on their shares of profits. But the shares must be identified by the partners’ legal profit-sharing rights.
Section 850 ITTOIA
This provision allocates partnership profits or losses to partners for income tax purposes. The Supreme Court confirmed that it depends on legal entitlement, not on economic expectation.
Section 687 ITTOIA
This is a residual charging provision. It taxes income from a source that is not taxed elsewhere. In this case, the deferred awards were income from the legal decision-making framework created by the LLP deed.
Braganza discretion
A contractual power described as “absolute discretion” may still be subject to implied duties. The decision-maker must act rationally and for the purpose for which the power was conferred.
Impact
The decision is significant for tax planning involving LLPs and partnerships. It confirms that HMRC cannot use section 850 to reallocate profits away from a corporate member to individual members merely because the arrangements were tax-motivated or because later payments were expected.
However, the judgment also makes clear that deferred remuneration arrangements may still be taxed under section 687 when later payments are made. The decision therefore limits one HMRC argument but strengthens another.
More broadly, the case is an important statement on the limits of purposive interpretation in tax law. Courts will interpret tax statutes purposively, but liability must still be grounded in the language Parliament enacted.
Conclusion
The Supreme Court established two important principles. First, section 850 ITTOIA requires actual contractual profit-sharing rights during the relevant period. Secondly, deferred LLP awards paid under a legally structured discretionary scheme can be taxable under section 687 as income from a source.
The result is a balanced judgment: HMRC could not rewrite the profit allocation under section 850, but the individual members were still taxable on the deferred income they ultimately received.